New Age Financial Analytics

The Reform of FDI in Defence is a Good Thing

The DIPP (Dept. of Industrial Policy and Promotion) has requested the cabinet to allow 100% FDI in the defense sector, up from the current 26%, says Economic Times. Upto 49% without tech transfer and 74% with tech transfer is proposed, but firms will still have to get approval due to the sensitive nature of the sector. 100% would be reserved for “state of the art” technology, which is what, we hope, will not kill any more pilots of aircrafts.

This is huge because we import a lot of defence products. Even our defense suppliers who manufacture stuff locally have to import parts from abroad. If they could buy things here, they would – and that will given foreign companies some impetus to set up here as well.

Commerce ministry sources say that, given the new government’s focus on promoting manufacture to generate employment, and with a new defence minister who is less protective of indigenous defence industry, the international defence industry’s longstanding demand to lower entry barriers into India might well be granted.

Even so, there will be stout resistance from the department of defence production (DDP), and from an indigenous defence industry that worries that the unfettered entry of international vendors would wipe out fledgling Indian defence companies.

“Please name one country that allows foreign defence companies unfettered access to the market. America theoretically allows 100 per cent FDI, but its laws mandate that every single employee must be a US national and the company must operate exclusively on US soil. India hasn’t the means to enforce such rules, and foreign companies will take full advantage,” says the CEO of a major Indian private sector defence company.

So watertight are the US laws that the Tel Aviv based president & CEO of, say Israeli company Elbit is required to take Washington’s permission before he can visit his own company facilities that operate in the US.

And then, let’s look at the top defence exporters in the world, in the context of the above table:

Russia and China – two of the largest emerging countries – have more exports than imports. India just imports a heck of a lot – it doesn’t export any significant quantity.

So what exactly has our protected defence industry achieved? Not much, it seems. Giving examples of the US is okay but US is actually the world’s largest arms exporter despite their rules. And they can afford to have crazy rules if they want. India really cannot, because instead of spending all that money on imports, we might as well benefit our local organizations.

If foreign companies can set up here, and have more control on their companies, they will choose to bring more technology into India. We have rules of 49% with no tech transfer and more when including some. We have software and hardware professionals here who can design great defence products, but can’t really because of lack of FDI support – after all even our retail entrepreneurs like Flipkart and Snapdeal are largely supported by money from abroad, which is effectively FDI. And look how they’ve begun to own the space!

Yes, some foreign folks may not transfer much – like many software giants like Microsoft, Google or Amazon have not really brought their core technology development into India. But Indians have access to them, and when they leave those companies and join others or set up on their own, they take that knowledge in their heads, and eventually they’ll make great things for India as well.

More importantly, if a startup wants to build defence products, he can get financial investment from abroad. Having FDI in the “automatic” route, allows, at the very least, a financial investor to provide the money that’s required.

Of course we should have checks as well, both background checks and nationality in other cases. We should require Indian passports for those that are in the most sensitive of areas. But right now, it needs a lot more than that – a government ID, an uncle in the defence ministry, the gumption to manufacture sub-standard products for the defence and shrug when our servicemen die.

What we also need, apart from FDI, is opening up a lot more of defence research as well. Innovation in defence should also come to the masses, and we need to create that conduit as well. Remember, the internet came about because of a US Defence Project. Many great things have happened in India too – the DRDO for instance helped design a ligher and more durable artificial limb (Jaipur foot).

FDI, in the manner proposed is a great first step. We need more, not less participation. Our current defence suppliers need the foreign capital and technology and only a good FDI policy will enable that. The competition will only make things better. Let there be no more airforce pilots that die in MiG crashes.

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Deepak Founded Capital Mind, which mines financial data and provides analytics. Deepak is part of the core team that helps build, grow and keep our data platform up to date. He lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

4 Comments

There is no doubt that FDI in defence is a good thing – even totally opening it up! If imports are allowed, what is the harm if foreigners manufacture in India? It just doesn’t make sense. The only reason FDI was not allowed hitherto was because some people made money (on imports)

Sachin
June 1, 2014 at 12:16 AM

Problem with indian defense manufacturer (and other sectors as well) is that they give USA example when it suits them, but when it comes to quality and mass production they are lagging way behind. Even in IT sector most of indian companies are doing “maintenance” jobs (many call it development), with negligible innovative stuffs.
In short we lost more than what we gained in last 65 years of closed economy. I will let few rich scoundrels earn money if we can pull millions out of poverty.

FDI in Defense is good thing for use. It will help to bring in new technology know how in country and help reduce dependency on imports.

amitvik.m
June 2, 2014 at 12:46 PM

Since I work for company operating in defence space, I could relate what ever you said and agree with you. The present policies with DRDO are not at all conducive for local companies be it in timelines, orders placement, payment, selection of vendors etc. Many rules are relaxed for foreign suppliers and they dance to their tunes. Because of these reasons, Indian big companies do not enter defence in research and development.

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